Superior Water, Light and Power Company -- Moody's downgrades Superior Water, Light & Power to Baa1; outlook stable

Rating Action: Moody's downgrades Superior Water, Light & Power to Baa1; outlook stableGlobal Credit Research - 22 Apr 2021Approximately $12.5 million in debt securities affectedNew York, April 22, 2021 -- Moody's Investors Service, ("Moody's") today downgraded Superior Water, Light and Power Company's (SWL&P) ratings, including its Issuer rating to Baa1 from A3 and its senior secured rating to A2 from A1. The outlook is stable.Downgrades:..Issuer: Superior Water, Light and Power Company....LT Issuer Rating, Downgraded to Baa1 from A3..Issuer: Superior (City of) WI....Senior Secured Revenue Bonds, Downgraded to A2 from A1Outlook Actions:..Issuer: Superior Water, Light and Power Company....Outlook, Remains StableRATINGS RATIONALE"SWL&P's financial profile is being negatively affected by costs associated with the mandated environmental remediation of a former manufacturing gas plant (MGP) site," stated Edna Marinelarena, Moody's analyst. The company's financial metrics will be impacted by the accounting treatment of these costs, putting pressure on an already weakened financial position. We see the company's cash flow from operations before changes in working capital to debt falling to as low as 13% over the next three years before recovering, well below historical levels that had ranged from 30% to 40% between 2016 and 2018.According to General Accepted Accounting Principles (GAAP), the utility is recording the expenditures related to the MGP site remediation under long-term regulatory assets (instead of cash flow from investments). Given that Wisconsin regulation does not allow a return on these expenditures, such costs are considered in SWL&P's CFO pre-WC (a Moody's standard adjustment). Additionally, the recovery of these costs are subject to regulatory approval upon the company filing a request, which it cannot do until after the spending occurs. Although we view SWL&P's regulatory environment as credit supportive, this will result in significant regulatory lag and some uncertainty around both full cost recovery and the timeliness of this recovery.SWL&P is among the smallest Moody's rated utilities, with a rate base of $84 million. The electric utility operations make up about 70% of total revenues (2020) with industrial customers comprising about a relatively high 50% of revenues. The company's financial profile had historically been robust with recent declines attributed to lower sales from its second largest industrial customer shutting down production after a 2018 fire as well as the impact of the coronavirus driven economic slowdown. These cumulative effects had already lead to weaker metrics including CFO pre-WC to debt ratio in the lower 20% range over the last two years.The expected further reduced financial cushion heightens the company's business risk profile given that its limited size and scope makes it less able to adequately cope with unexpected events. In such circumstances, SWL&P would likely rely on financial and operational support from its parent, ALLETE, Inc. (Baa1 stable), from which it has a $10 million revolving credit facility. The combination of lower metrics, reduced financial flexibility and a reliance on its Baa1 rated parent company provide additional rationale for the downgrade.Rating OutlookThe stable outlook reflects our expectation that, although the company's financial profile will be pressured over the next several years due to the costs associated with the environmental remediation mandate, the company's revenue base remains solid and we expect metrics to stabilize and eventually improve, leading to financial ratios consistent with the current rating. The outlook further incorporates our expectation that no additional long-term debt will be issued by the utility to finance these or other capital expenditures.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors That Could Lead to an UpgradeA rating upgrade could occur if there is an upgrade of ALLETE and if the company's financial profile improves materially including a CFO pre-WC to debt ratio above 22% on a sustained basis.Factors That Could Lead to a DowngradeA rating downgrade could occur if the company fails to reverse the long-term decline in credit metrics such that CFO pre-WC to debt ratio is sustained below 19% after the remediation spending, or if there is a decline in regulatory support for the utility. Additionally, the rating could be downgraded if the utility issues additional long-term debt or if there is a downgrade of ALLETE.PROFILESWL&P is a small regulated electric transmission and distribution company with an $84 million rate base. It provides utility services to approximately 15,000 electric customers, 13,000 natural gas customers and 10,000 water customers in the city of Superior, Wisconsin and the surrounding areas of northwestern Wisconsin. SWL&P is a wholly-owned subsidiary of ALLETE and accounts for approximately 5% of ALLETE's consolidated operating cash flow and 3% of its consolidated assets.The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Edna Marinelarena Analyst Infrastructure Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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